Will Roche, Pfizer, Novartis and BMS merge ?

Posted on 7 months ago by Gerry Kennedy

Last month, a couple of analysts addressed Bristol-Myers Squibb as a takeover target for some rival pharma giant. The gist? The combination of disappointments on its cancer blockbuster Opdivo plus a solid product line-up could well put a bullseye on the company—and its “very logical, very rational” management team wouldn’t dismiss offers out of hand.

Now, rumors are surfacing that Swiss-based drugmakers Roche and Novartis, leaders in the cancer field, and Pfizer are actively looking at a buyout. StreetInsider, which cited anonymous sources in reporting the talk, also said that Gilead Sciences—which, as executives recently admitted, needs some significant M&A to grow—might be considering the idea.

Meanwhile, a range of drugmakers, including Pfizer, could soon bring home overseas cash if U.S. tax reform cuts the government's take. Many billions, in fact.

Rumors are rumors, of course, and deal talk can swirl up with the slightest encouragement. The idea of Gilead digesting Bristol-Myers? Somewhat far-fetched. But as Barron’s pointed out Tuesday afternoon, Bristol-Myers shares took an upward turn on the news, meaning at least some investors aren’t dismissing the idea, either. The shares were up by 3% midday and closed at $53.71; they’re up past $54 Wednesday morning.

Bristol-Myers would be a big deal to swallow—its market cap currently stands at about $93.5 billion, according to Yahoo Finance—which means only a few companies could step up. Most drugmakers say they're not in the market for megamergers, including Roche and Novartis.

Pfizer, on the other hand, has shown an appetite for huge deals over the past few years, with its failed takeover of AstraZeneca and agreed-on Allergan buyout, which was scuttled by stricter rules on using tax inversions to move corporate domiciles overseas. Since then, Pfizer executives have talked up smaller deals, such as its $5.2 billion Anacor buyout, but haven’t totally and completely ruled out a “transformative” deal.

Plus, U.S. companies may find themselves flush with cash if President Donald Trump and the Republican Congress push through tax reforms that would allow them to bring home their overseas stashes without paying the current sizable tax penalties. The president has suggested cutting the repatriation tax to 10% during a temporary “holiday,” and pharma-watchers figure that holiday would trigger more M&A.

Pfizer is among the companies with the biggest chunks of change awaiting repatriation when and if the moment arrives. According to market estimates, the company has about $80 billion in overseas cash. Together with Johnson & Johnson, Merck & Co. and Eli Lilly, the Big Pharma cash pile rises to about $250 billion, according to Citizens for Tax Justice. Amgen has about $34 billion offshore, and Gilead has about $25 billion.

But would any of these companies really shell out what would be necessary to nab Bristol-Myers? Leerink Partners’ Seamus Fernandez wrote last month that the company’s assets could well be worth it. “[W]e believe Opdivo, Yervoy, and the burgeoning immuno-oncology pipeline at BMS is a high-value industry asset that cannot be ignored,” Fernandez wrote.

“If history teaches us anything in pharma,” he went on, “it is that companies suffering from short-term missteps or surprises but with great assets are more likely than not to become vulnerable M&A targets over time ... if there isn't either a reversal of fortune or a series of value-added pipeline surprises.”

And as Mark Schoenebaum of Evercore ISI Group reminded Barron’s Tuesday, he pointed out last week that the Bristol-Myers executive team isn’t the type to be “guided largely by emotions and pride” and would likely enter into merger talks if the proposals made sense.

“I think [they] would be … incredibly shrewd negotiators, they would want the highest price possible. But in my mind … ultimately the decision would be guided by the spreadsheet,” he wrote.

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